Jan. 11 (Bloomberg) -- MBIA Inc. sued Flagstar ABS LLC
claiming it made misrepresentations to induce the bond insurer
to issue policies for two mortgage-backed securitizations that
defaulted, leading to more than $165 million in claims payments.

MBIA, based in Armonk, New York, alleges that Flagstar
sponsored two securitizations known as 2006-1 and 2007-1 and
avowed that it had originated or acquired all of the loans and
each complied with underwriting guidelines, according to the
complaint filed today in U.S. District Court in Manhattan.

Flagstar “pierced the heart of the parties’ bargain by
selling the trusts collateral pools replete with breaching
loans,” MBIA said in the complaint. “Flagstar’s warranties
were false,” with more than 90 percent of the loans reviewed in
samples violating them, MBIA alleged.

The 2006 transaction, which had a principal balance of
about $400 million, defaulted, resulting in losses totaling
about $51 million and claim payments of more than $32 million,
MBIA said. The 2007 transaction, with a principal balance of
about $625 million, also defaulted, leading to losses of more
than $174 million and resulting in $133 million in loan
payments, the bond insurer claims.

In each transaction, the unit of Troy, Michigan-based
Flagstar Bancorp Inc. sold a pool of mortgage loans to trusts,
which issued securities backed by cash flows from the loans and
MBIA’s financial guaranty policy.

Relief Sought

Flagstar has refused to buy back any defective loans, MBIA
said. The bond insurer seeks relief “sufficient to place MBIA
in the position it would be in had it not entered into the
insurance agreements and issued the policies.”

Flagstar doesn’t comment on pending litigation, Susan
Cherry-Bergesen, a company spokeswoman, said in an e-mail.

Flagstar Bancorp last February agreed to pay $132.8 million
to settle a U.S. lawsuit accusing it of improperly approving
home mortgage loans for government insurance. Flagstar
delegated key underwriting functions to unqualified employees
and submitted false documents to the government, inducing the
Federal Housing Administration to insure ineligible mortgage
loans, the U.S. said.

The bank set a daily quota for underwriters processing
loans, Manhattan U.S. Attorney Preet Bharara said at the time
the U.S. suit was filed.

The case is MBIA Insurance Corp. v. Flagstar ABS LLC,
13-0262, U.S. District Court, Southern District of New York
(Manhattan).